Lecture 4

Question 1

Define equity capital

Answer 1

• the net worth the of enterprise

- difference between book value of assets and book value of liabilities

Question 2

What are the functions of bank capital?

Answer 2

• • a cushion against risk by absorbing losses
• maintains public confidence
• provides protection to depositors
• fulfils regulatory requirement
• permanent commitment of shareholders because banks do not buy back shares these must be sold to other possible shareholders in the secondary market

Question 3

What does capital act as a buffer as?

Answer 3

• unexpected losses to protect against insolvency

Question 4

The equation to calculate the probability of insolvency

Answer 4

inherent risk
minus management and control
minus capital support